Research Affiliates examines how starting yields and valuations influence long term stock and bond returns, arguing expected returns are more about current pricing than prediction. The paper suggests bond yields explain roughly 75% of future returns, while equity dividend yields remain useful despite noisier outcomes.
Pricing Stocks and Bonds
Research Affiliates
Jim Masturzo
Research
11 Pages
Key Takeaways
Bond Yield Predictability: 10 year Treasury yields showed a 0.75 R² relationship with future 10 year returns from 1900 through 2017.
Dividend Yield Limits: From 1871 through 2017, equity dividend yield produced just a 0.15 R² with future returns, highlighting materially weaker predictive power than bonds.
Portfolio Mix Benefits: The sample portfolio delivered 9.3% annual returns with 11.3% volatility versus 8.5% returns and 11.7% volatility for a monthly rebalanced 60/40 portfolio.
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